Limited Liability Companies Are the Business Entity of Choice in Ohio
Crain’s Cleveland Business reports that, since the advent of limited liability companies 30 years ago, LLCs have “become the entity of choice” in Ohio for the formation of new business enterprises. Prior to the enactment of LLC legislation, people typically formed corporations or partnerships when they set up a new business. Over the past three decades, people who decided to launch a business have frequently turned to the LLC entity in order to take advantage of the benefits which the LLC offers over the partnership and corporation structures.
The CBS News website notes that there are two key advantages offered by an LLC. First, when it comes to taxes, LLCs are deemed to be “conduit entities” meaning that they pass through the taxable income to LLC members. Members report the profits or losses from the LLC on their personal income tax returns.
Second, like a corporation-but unlike a partnership-LLCs offer members limited liability protection. Specifically, LLCs operate to shield your personal assets from the liabilities of the business. Thus, if the business sinks into debt, banks and other creditors cannot seize members’ personal property. LLC members are typically liable to creditors only if they signed a personal guaranty agreement on loans to the business.
In addition to offering business owners tax and limited liability advantages, the LLC structure offers its members the same ease of operation and flexibility of a partnership. Accordingly, an LLC gives its members a great deal of latitude when it comes to just how the business will be managed.
The Wall Street Journal observes that it is important for multi-member LLCs to have a written operating agreement. Broadly speaking, the operating agreement will set forth the details of how the LLC will be managed. Moreover, it will define with precision the respective members’ percentage of ownership in the company together with their roles, rights and duties. If LLCs are to be run by managers, the agreement needs to spell out their duties and responsibilities as well. Fortunately, Ohio law affords LLC members a great deal of flexibility in crafting operating agreements which meet the specific needs of LLC members.
According to Entrepreneur magazine, the operating agreement is a good place to incorporate any verbal agreements between LLC members which, if not reduced to writing, could lead to subsequent misunderstandings. People contemplating setting up an LLC should also consider putting a buy-sell provision in an operating agreement which sets forth the procedures for how to transfer or dispose of a member’s LLCs interest if he or she dies or wants to retire from the business.
Because the operating agreement is a binding contract between the members, one should never be executed until each LLC member has thoroughly reviewed it. After its execution, care should be taken to keep the agreement in a safe place together with the LLC’s other core records.
Seek legal advice
If you are thinking about forming a limited liability company as the entity for a new business, you should contact an Ohio attorney experienced in business formation. The attorney can draft an LLC operating agreement which plainly and unambiguously sets forth the rights, duties and obligations of LLC members.